Question

Inolividual willing news to Pay * 4 4 There are 4 . sellers in a Market Firm beepply price 15 - dno 25 2 Draw denand supply curves in a diagram and find equili becium purice quantity in Calculate total honlus. Calculate the Deadweight loss when the yout impores a tax of Resper unit.

Please show detailed procedure

Answer 1

1) Given the values, demand and supply curve is drawn using following procedure:

Demand curve: marginal willingness to pay shows how much a consumer is willing to pay for an extra unit of good. Thus, at price 20, only D will buy the good. But at 15, 2 people (C and D) will buy the good. As the price falls, more people are able to buy a commodity, and a curve is carved out. Demand curve is shown with blue. The steps signifies indifference of the next person to buy or not buy the good. Thus, at 15, second individual is indifferent from buying, hence the flatness.

Supply curve: At price 2, only Firm 3 will be supplying goods, but as the price rises, more and more firms are able to supply goods, hence the curve slopes upward. The black line shows the supply curve.

Equilibrium: It is where supply and demand curves meet. In the diagram it is at Price 15 and number of commodity at 2.

25 ps

2) Total surplus is a sum of producer and consumer surplus at given price.

Consumer surplus(CS): At equilibrium price, only C and D are able to buy. D gets the commodity at 15, even though she values it at 20, so she gets benefit of 5, whereas net benefit of C is 0.

Total CS= 5+0= 5

Producer Surplus(PS): At 15, Firms 1,3 and 2 will supply. Firm 3 can supply at rice 2, but she is getting price 15, hence her total surplus is 13. Similarly, Firm 1 gets net benefit of 10 and Firm 2 do not get any net benefit

Total PS = 13+10+0= 23

Total surplus = CS+PS = 5+23 = 28

3) Dead weight loss is calculated by amount of decrease in total surplus.

Assume that tax is levied on consumers, so that their benefit is lowered by Rs 5. Which means that, D will get marginal benefit of Rs 20 than Rs. 15. Hence, demand curve shifts downward by margin of Rs. 5.(blue line shows the new demand curve)

2 PS 1 2 3 4 5

After shift equilibrium price and quantity are 10 and 2 respectively.

here total CS = 5

Total PS = 5 + 8 = 13

Total surplus = 18

Change in surplus(dead weight loss)= 28-18= 10